NEW DELHI, Feb 13 (Reuters) - India put on hold a $750
million deal to buy helicopters from Finmeccanica SpA after the
arrest of the head of the Italian defence group, as political
opponents tried to capitalise on the latest scandal to hit the
government before elections next year.

India will not make more payments or take delivery of nine
helicopters until a probe by the Central Bureau of Investigation
(CBI) is complete, two officials at India's Defence Ministry
with knowledge of the matter told Reuters on Wednesday.

"India decides to put on hold the delivery of helicopters,"
one of the sources said, adding that the suspension would hold
until the CBI completed its enquiry. When asked about payment,
the official said: "Payment as well."

The second source confirmed that the decision to suspend the
deal had been taken.

India's most watched English-language news channel, Times
Now, later ran its own report saying Defence Minister A.K.
Antony had confirmed that the deal was suspended.

Finmeccanica shares were briefly suspended from
trade in Milan after falling more than 5 percent on the reports
from India before recovering slightly to close down 4 percent at
4.23 euros.

Italian police arrested Finmeccanica's chief executive
Giuseppe Orsi on Tuesday for for allegedly paying bribes to
secure the sale of 12 AgustaWestland executive helicopters to
the Indian Air Force when he was head of the Finmeccanica
helicopter unit. The first three helicopters have already been
delivered. Orsi's lawyer denied the allegations.

The conglomerate, 32 percent owned by the Italian state, was
due to hold a board meeting on Wednesday afternoon to broaden
the powers of its long-standing chief operating officer to stand
in for Orsi, a source familiar with the situation said.

The company promised a statement later on Wednesday.

HISTORY OF CORRUPTION

India, the world's largest weapons importer, has a long
history of defence deal corruption. The opposition Bharatiya
Janata Party (BJP) was quick to attack the Congress party-led
government for not acting sooner on allegations that bribes had
been paid in the deal.

Antony ordered the CBI investigation on Tuesday into the
purchase of the luxury helicopters, which were destined for use
by India's leaders.

"If any individual or foreigner, any firm, are involved in
this malpractice, nobody will be spared. We will take action
against them, whatever may be the consequences," he told
reporters.

Finmeccanica's Alenia Aermacchi and AgustaWestland units are
pursuing Indian business worth $12 billion this year, defence
analysts IHS Jane's said, including more helicopters and
military transport planes.

Prime Minister Manmohan Singh's government has been buffeted
by scandals over the sale of mobile phone spectrum, coal fields
and contracts for the 2010 Commonwealth Games in Delhi, and its
record on graft will be a key issue in elections due by 2014.

In the 1980s, a multi-million dollar scandal over the
purchase of Swedish Bofors artillery guns contributed to an
election defeat for Congress and its prime minister, Rajiv
Gandhi.

The Defence Ministry has put in place strict guidelines for
arms deals in an effort to crack down on corruption. Last year,
six companies including Rheinmetall Air Defence, part of
Germany's Rheinmetall AG, were placed on a blacklist
of arms firms banned from doing business in India. Rheinmetall
strongly denied the allegations against it.

"I see the making of another Bofors in this," said
opposition BJP spokesman Ravi Shankar Prasad.

The Bofors scandal implicated an Italian middleman close to
the Gandhis, and the BJP often seeks to play up the Italian
origins of Congress leader Sonia Gandhi, Rajiv's widow.

ALLEGATIONS IN OCTOBER

The Indian Express newspaper had access to Italian
prosecution documents last October and ran a series of stories
giving detailed accounts of the alleged bribery and named
several Indians said to have been involved.

Prasad asked why the government had not launched a police
investigation earlier.

"The suspicious circumstances surrounding this raises one
fundamental question again - the fact that it was an Italian
company, was it the grounds to go slow?"

Defence Minister Antony criticised Italy for not responding
to requests for information about the case. "From day one, we
have been trying to find out the truth and we conveyed that to
them," he said. "So far we have not received any details."

He said his ministry's internal enquiries had so far found
no evidence against Finmeccanica, but refused to answer specific
questions about the Italian allegations, saying the CBI
investigation would find the truth.

The Italian arrest warrant for Orsi said three cousins of
former Indian air force chief Shashi Tyagi had received
kickbacks and helped to twist rules in favour of AgustaWestland
in the helicopter tender. None of the Tyagis has been accused of
wrongdoing by officials in India.

Shashi Tyagi denied all wrongdoing and described the charges
as "bunkum". Speaking at his home near Delhi, he said that a
specified service ceiling of 18,000 feet (5,500 metres) had been
reduced to 15,000 feet, but during a government led by the
opposition BJP and before his time as air chief.

He said the change had been necessary because only one
helicopter was able to fly that high.

Tyagi, who spoke openly and extensively with media on
Wednesday about the case, also said the helicopter deal had been
sealed three years after he retired from the air force in 2007.

Antony, who became defence minister in 2006, said he could
not comment on accusations against Tyagi.

"I have no information within my hands ... How can I say
anything? At the moment, I will not say anything against any
individual unless I get some reports from CBI," he said.